Is an Annuity For Me?

Annuities offer useful benefits, but they are not a good investment for everyone. Annuities provide income for the future and, in many cases, income for life. This is why most investors use annuities for retirement. While putting all your money into annuities (or any investment) is never a good idea, annuities have a place in the investment portfolio of people in certain financial situations.

Baby Boomers

An annuity can be useful investment vehicle for people nearing retirement. Annuities can be a good choice for those already in retirement or nearing retirement, but not the only solution for saving money. High-wealth individuals or those who have maxed out their 401(k)s or IRAs should considered a deferred annuity. Individuals who are in retirement and wish to transfer some of their saving to guaranteed lifetime income should consider an immediate annuity. In general, people age 45 and older are good candidates for annuity investing, but age is not the only criteria for determining if annuities are right for you. Other factors are also important.

Long Term Growth

Deferred annuities are a good choice for individuals who want to invest for the long-term. A person should only invest money he knows he won’t need for the foreseeable future. You won’t have access to the money in the annuity without incurring huge penalties. There are also tax implications for early withdrawal. The tax deferment ends if you withdraw the money early. If you think you will need to use the money in the short-term or before age 59 ½, most deferred annuities aren’t a good investment for you. But there are other types of annuities that may be more suitable. A period certain annuity provides payments for a specific period of time such as 10 or 15 years. For individuals not interested in long-term growth, immediate annuities are an option. After funding the immediate annuity with one lump sum payment, you start receiving income immediately, and these payments continue for the rest of your life. The main drawback with immediate annuities is that once the owner gets a payment, he or she can’t withdraw the funds or cash out. Period certain annuities and immediate annuities are options to consider when planning for the future.

High Income Bracket

Most people who invest in annuities have already contributed the maximum amount they can to their existing retirement plans. This includes IRAs, 401(k), 403 (b), Keogh plans, SEP and other qualified retirement plans. Annuities offer an additional way to save money for retirement. The tax advantages of annuities also help those in the higher tax brackets. Annuities offer tax deferment.

For those in a lower tax bracket and pay little or no taxes, there are fewer tax breaks for investing in annuities. Also those with lower income probably haven’t reached the maximum allowable contribution set forth by the IRS (Internal Revenue Service). The maximum amount depends on your age and the type of retirement plan you have. If you have reached the maximum limit with other retirement plans, and want to invest more money for the future, annuities are a good choice.

Asset Protection

In some states, annuities offer asset protection. This means the money in the annuity is judgment-proof. Creditors never have access to this money. As the number of lawsuits continues to increase, protecting what assets you have is an important financial strategy. If you are in a car accident or if someone gets injured on your property, you may be sued. Annuities help you to protect some of your assets. Check with the financial firm setting up the annuity to learn if your state laws offer asset protection for annuities.

With most annuities, only a small percentage of people will find this type of investment a good fit. Individuals at or near retirement age, in a high tax bracket and looking for a long-term investment are in the best financial situation to invest in annuities. However, other people may also find annuities suitable for their financial needs. As the definition of annuities expands, and the investment product diversifies, more and more people will consider investing in annuities.

To learn about annuities, read the article The Different Types of Annuities.